FIN 201 _ Questions

Tutorial 1
1. What are the differences between sole proprietorship and corporation (comparing the
strengths and weaknesses)?
2. Compare and contrast the terms “stockholder” and “stakeholder.”
3. Is the shareholder wealth maximization goal a short or long-term goal? Explain your answer.
4. Define the Shareholder Wealth Maximization. Why is profit maximization, by itself, is an
inappropriate goal? Can there be a difference between profit maximization and shareholder-
wealth maximization? Which of the two should be the goal of the firm and its management?
5. What are some of the ways in which manager-shareholder conflicts may be controlled?
6. What are agency costs or agency problems or agency conflict? Why do these tend to increase
in severity as a corporation grows larger?
Chapter 1_MCQ questions
1) At its most basic level, the function of financial intermediaries is to ________.
A) track and report interest rates
B) move money from lenders to borrowers and back again
C) report all financial transactions to the federal government
D) effect a transfer of wealth in society

2) Which of the following is NOT an example of a financial transaction?

A) Your parents use their credit card to pay this term's college tuition.
B) You use the ATM to withdraw British pounds so you can fly to London.
C) Your roommate lends you $20 and you repay it in one week.
D) All of the above are financial transactions.

3) The movement of money from lender to borrower and back again is known as ________.
A) the circle of life
B) corporate finance
C) the cycle of money
D) money laundering

4) The common objective of borrowing and lending is to ________.

A) make all parties better off
B) gain a profit at the other's expense
C) make a firm or individual appear more liquid than is really the case
D) thwart regulatory authority

5) Which of the following is NOT a function of a financial intermediary in the

lending/borrowing process?
A) To help establish terms of the lending/borrowing agreement
B) To match the borrower and the lender
C) To bear the risk that the borrower will not repay
D) All of the above are functions of a financial intermediary.
6) You place $500 into your checking account at First Bank and earn 1% APR on your deposit.
Your professor borrows money at a rate of 8% from the same bank for a tuition loan for her son.
Which of the following statements is true?
A) The bank is criminally liable to you for paying an interest rate lower than the expected rate of
inflation.
B) You and your professor have an obvious conflict of interest because you have accounts at the
same financial institution.
C) You benefit from earning interest on your deposit, safety for your funds, and having a
recognizable means for paying for your financial obligations without having to hold cash.
D) Your professor is the only party to be made worse off by this example because she is the only
party paying net interest.

7) The basic function of financial intermediaries is to move advice from lenders to borrowers and
back to lenders.

8) In the lending/borrowing process, a financial intermediary function is to bear the risk that the
borrower will not repay.

9) All financial transactions have a buyer and a seller.

10) Give three examples of a financial transaction.

Overview of Finance Areas

1) Which of the following best identifies the four main areas of finance?
A) Exchange rate management, investments, financial institutions and markets, international
finance
B) Corporate finance, investments, capital structure, international finance
C) Corporate finance, investments, financial institutions and markets, international finance
D) Corporate finance, capital budgeting, financial institutions and markets, regulation

2) Of the following, which is NOT one of the four main areas of finance?
A) International finance
B) Corporate finance
C) Investments
D) All are considered main areas of finance.

3) The set of financial activities that support the OPERATIONS of a business is best described
by which main area of finance?
A) Corporate finance
B) Investments
C) Financial institutions and markets
D) International finance

4) ________ is the area of finance concerned with activities such as borrowing funds to finance
projects such as plant expansions or new product launches.
A) Working capital management
B) International finance
C) Investments
D) Corporate finance

5) ________ is the area of finance concerned with activities such as repayment of borrowed
funds through dividends or interest payments.
A) Investments
B) Corporate finance
C) Capital budgeting
D) International finance

6) ________ is the area of finance concerned with the activities of buying and selling financial
assets such as stocks and bonds.
A) Investments
B) Corporate finance
C) International finance
D) Financial markets and institutions

7) Which of the following is NOT typically thought of as an investment activity?

A) Accurately pricing financial assets
B) The process of buying and selling financial assets
C) Repaying borrowed funds
D) Negotiating the rules and regulations of financial transactions

8) The organized financial intermediaries and the forums that promote the cycle of money is a
good definition of which of the following main areas of finance?
A) Corporate finance
B) Investments
C) Financial institutions and markets
D) International finance

9) Financial institutions and markets

A) are the organized financial intermediaries and the forums that promote the cycle of money.
B) compose the set of financial activities that support the operations of a business.
C) are the activities centered on the purchase and sale of financial assets.
D) are concerned only with the addition of a multinational element to all finance activities.

10) Of the following, which is NOT an example of a financial intermediary?

A) Commercial bank
B) Insurance company
C) Investment bank
D) All of the above are financial intermediaries.

11) Of the following, which is NOT an activity engaged in by a financial intermediary?

A) Matching borrowers and lenders
B) Bearing risk
C) Managing retirement portfolios for large classes of employees
D) All of the above are activities of financial intermediaries.

12) "Concern with the multinational elements of financial activities" best describes which of the
four main areas of finance?
A) Investments
B) International finance
C) Corporate finance
D) Financial institutions and markets

13) Which of the following is a reason why expertise in international finance is important?
A) The process of assessing risk among many countries is more difficult than assessing risk for a
single country.
B) Financial regulatory rules and requirements differ from country to country.
C) Changes in economic conditions impact the relative values of currency among countries.
D) All of the above are reasons for gaining expertise in international finance.

14) Which of the following is NOT an activity of a financial institution or market?

A) Bringing together buyers and sellers of financial assets
B) Providing a market for the transaction of financial assets
C) Providing information to buyers and/or sellers of financial assets
D) All are activities of financial institutions.

Tutorial 2
1. With regards to financial ratio analysis, how do the viewpoints held by the firm’s present and
prospective shareholders, creditors, and management differ?
2. What is the difference between dividends and interest expenses?
3. Which statements of greater interest to creditors? Which would be of greatest interest to
shareholders?
4. Zarith publishing company has an annual credit sale of RM1, 600, 000 and a gross profit
margin of 35 percent.
a. If the firm wishes to maintain an average collection periods of 50-days, what level of
account receivable should it carry?(Assume a 365-day year)
 b. The inventory turnover for this industry average six times. If all of Zarith’s sales are on
credit, what average level of inventory should the firm maintain to achieve the same
inventory turnover figure in the industry?
5. NZ’s Shoe Stores has RM2, 000, 000 in yearly sales. The firm earns 3.8 percent on each
Ringgit of sales and turns over its assets 2.5 times per year. It has RM 60,000 in current
liabilities and RM 140,000 in log-term liabilities.
a. What is its return on stockholders’ equity?
b. If the asset base remains the same as computes in part a, but total assets turnover goes up
to 3, what will be the new return on stockholders’ equity? Assume that the profit margin
stays the same as do current and long-term liabilities.
6. Ratio comparisons Robert Arias recently inherited a stock portfolio from his uncle. Wishing
to learn more about the companies in which he is now invested, Robert performs a ratio
analysis on each one and decides to compare them to each other. Some of his ratios are listed
below.
Island Burger Fink Roland
Ratio Electric Utility Heaven Software Motors
Current ratio 1.10 1.3 6.8 4.5
Quick ratio 0.90 0.82 5.2 3.7
Debt ratio 0.68 0.46 0.0 0.35
Net profit margin 6.2% 14.3% 28.5% 8.4%
Assuming that his uncle was a wise investor who assembled the portfolio with care, Robert finds
the wide differences in these ratios confusing. Help him out.
a. What problems might Robert encounter in comparing these companies to one another on
the basis of their ratios?
b. Why might the current and quick ratios for the electric utility and the fast-food stock be
so much lower than the same ratios for the other companies?
c. Why might it be all right for the electric utility to carry a large amount of debt, but not the
software company?
d. Why wouldn’t investors invest all of their money in software companies instead of in less
profitable companies? (Focus on risk and return.
Tutorial 3
1. What kind of items should you expect to find recorded in a firm’s cash budget?
2. Is it safe to rely solely on historical data when preparing the forecast for sales revenues? Why
or why not?
Table 4.2

Magna Fax, Inc.

Balance Sheet
For the Years Ended December 31, 2014 and 2015

3. The credit manager at First National Bank has just received the income statement and balance
sheet for Magna Fax, Inc. for the year ended December 31,2015. (See Table 4.2.) The bank
requires the firm to report its earnings performance and financial position quarterly as a
condition of a loan agreement. The bank's credit manager must prepare two key financial
statements based on the information sent by Magna Fax, Inc. This will be passed on to the
commercial loan officer assigned to this account, so that he may review the financial
condition of the firm.
(a) Prepare a statement of retained earnings for the year ended December 31, 2015.
(b) Prepare a summary of cash inflows and cash outflows for the year ended December 31, 2015.
(c) Prepare a statement of cash flows for the year ended December 31, 2015, organized by cash
flow from operating activities, cash flow from investment activities, and cash flow from
financing activities.

Tutorial 4
1. Why does money have a time value? Does inflation have anything to do with making a dollar
today worth more than a dollar tomorrow?

2. Adjust the annual formula for a future value of a single amount at 12 percent for 10 years to a
semiannual compounding formula. What are the interest factors (FVIF) before and after? Why
are they different? If, as an investor, you had a choice of daily, monthly, or quarterly
compounding, which would you choose? Why?

3. Lesley will receive RM12,000 a year for the next 15 years as a result of her patent. If a 9
percent rate is applied, should she be willing to sell out her future rights now for RM100,000?

4. a. Air Atlantic (AA) has been offered a 3-year old jet airliner under a 12-year lease
arrangement. The lease requires AA to make annual lease payments of RM500,000 at the
beginning of each of the next 12 years. Determine the present value of the lease payments if
the opportunity cost of funds is 14 percent.
b. Your firm, New Sunrise, has just leased a RM28,000 BMW for you. The lease requires six
beginning of the year payments that will fully amortize the cost of the car. What is the amount
of the payments if the interest rate is 12 percent?
5. You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to
receive RM20,000 at the end of each year for 30 years. You know that you will be able to
earn 11 percent per year during the 30-year retirement period.
a. How large a fund will you need when you retire in 20 years to provide the 30-years,
RM20,000 retirement annuity?
b. How much will you need today as a single amount to provide the fund calculated in part
(i) if you earn 9 percent per year during the 20 years preceding retirement?
c. What effect would an increase in the rate you earn both during and prior to retirement have
on the vales found in parts (i) and (ii)? Explain.
6. NZ started a paper route on January 1, 1998. Every three months, she deposits RM500 in her
bank account, which earns 4 percent annually but is compounded quarterly. On December 31,
2001, she used the entire balance in her bank account to invest in a contract that pays 9
percent annually. How much will she have on December 31, 2004?

Tutorial 5
1. Calculate the future value of an annuity of $5,000 each year for eight years, deposited at 6
percent.

2. Calculate the present value of an annuity of $3,900 each year for four years, assuming an
 opportunity cost of 10 percent.

3. Dottie has decided to set up an account that will pay her granddaughter (Lexi) $5,000 a year
indefinitely. How much should Dottie deposit in an account paying 8 percent annual interest?
4. Nico establishes a seven-year, 8 percent loan with a bank requiring annual end-of-year
payments of $960.43. Calculate the original principal amount.

5. A lottery administrator has just completed the state's most recent $50 million lottery. Receipts
from lottery sales were $50 million and the payout will be $5 million at the end of each year for
10 years. The expenses of running the lottery were $800,000. The state can earn an annual
compound rate of 8 percent on any funds invested.
(a) Calculate the gross profit to the state from this lottery.
(b) Calculate the net profit to the state from this lottery (no taxes).

6. Aunt Tillie has deposited $33,000 today in an account which will earn 10 percent annually.
She plans to leave the funds in this account for seven years earning interest. If the goal of this
deposit is to cover a future obligation of $65,000, what recommendation would you make to
Aunt Tillie?

Tutorial 6
1. Lycan, Inc., has 7 percent coupon bonds on the market that have 8 years left to maturity.
The bonds made annual payments. If the required rate of return on these bonds is 10 percent,
what is the current bond price?

2. Bond Yields. Smart Choice Plc has 10 percent coupon bonds on the market with 9 years
left to maturity. The bonds make annual payments. If the bond currently sells for $1,145.70,
what is the YTM? Given your required rate of return on these bonds is 10 percent, Should you
purchase the bond? Why?

3. Coupon Rates. Merton Enterprises has bonds on the market making annual payments, with 16
years to maturity, and selling for $963. At this price, the bonds yield 7.5 percent. What must
the coupon rate be on Merton’s bonds?

4. App Store Co. Issued 15-year bonds one year ago at a coupon rate of 6.1 percent. The bonds
make semiannual payments. If the YTM on these bonds is 5.4 percent, what is the current bond
price?

5. Bond Yields. Night Hawk Co. Issued 15-year bonds two years ago at a coupon rate of 8.4
percent. The bonds make semiannual payments. If these bonds currently sell for 108 percent of
par value, what is the YTM?
6. A comparison between coupon rate and yield to maturity could not determine whether a bond
is traded at par, premium or discount. It can only be done by comparing market price of the
bond to its par value. True or False? Explain.

7. Marshall Manufacturing has a bond outstanding that was issued 20 years ago at a coupon rate
of 9%. The $1,000 par value bond pays interest semiannually and was originally issued with a
term of 30 years. If today's interest rate is 14%, what is the value of the bond today?

8. Aurand, Inc. has outstanding bonds with an 8% annual coupon rate paid semiannually. The
bonds have a par value of $1,000, a current price of $904, and will mature in 14 years. What is
the annual yield to maturity on the bond?

9. DAH, Inc. has issued a 12% bond that is to mature in nine years. The bond had a $1,000 par
value, and interest is due to be paid semiannually. If your required rate of return is 10%, what
price would you be willing to pay for the bond?

10. The market price of a 20-year, $1,000 bond that pays 9% interest semiannually is $774.31.
What is the bond's yield to maturity?

Tutorial 7
1. What factors make the valuation of common stocks more complicated than the valuation of
bonds and preferred stocks?

2. (a) What are the two components make up the required rate of return on common stock?
(b) Which type of dividend pattern for common stock is similar to the dividend payment for
preferred stock?

3. In what way is preferred stock similar to long-term debt? In what way is preferred stock like
common stock?

4. Garden Beauty provides maintenance services for commercial buildings. Currently, the beta
on its common stock is 1.08. The risk-free is now 10 percent, and the expected return on the
market portfolio is 15 percent. It is january1, the company is expected to pay a RM2 per
share dividend at the end of the year, and the dividends is expected to grow at a compound
annual rate of 11 percent for many years to come. Based o the CAPM and other assumption
you might make, what dollar value would you place on one share of this common stock?

5. Over the past 5 years, the dividends of the Dave Corporation have grown from RM0.70 per
share to the current level RM1.30 per share (D0). This growth rate is expected to continue for
the foreseeable future. What is the value of a share of Dave Corporation common stock to an
investor who requires a 20 percent return on an investment?
6. (a) The preferred stock of NZ Corporation pays an annual dividend of RM6.30. It has a
required rate of return of 9 percent. Compute the price of the preferred stock.

(b) NZ Sportswear Corporation has preferred stock outstanding that pays an annual dividend
of RM12. It has a price of RM110. What is the required rate of return (yield) on the preferred
stock?

7. Terry Simex is expanding into a new geographic area. Management expects the new market
to fuel growth of 22 percent for three years. After that normal growth of 6 percent will
resume. Terry's most recent annual dividend was RM1.25. Lately other fruit companies
return about 12 percent. How much should a share of Terry be worth?

8. Julie's X-Ray Company paid $2.00 per share in common stock dividends last year. The
company's policy is to allow its dividend to grow at 5 percent for 4 years and then the rate of
growth changes to 3 percent per year from year five and on. What is the value of the stock if
the required rate of return is 8 percent?

9. Compute the value of a share of common stock of Lexi's Cookie Company whose most
recent dividend was $2.50 and is expected to grow at 3 percent per year for the next 5 years,
after which the dividend growth rate will increase to 6 percent per year indefinitely. Assume
10 percent required rate of return.

Tutorial 8
1. Barclay plc is assessing an investment project. The estimated cash flows are as
follows:

The business’s cost of finance is 15 per cent p.a. and it seeks projects with a three year
maximum discounted payback period. Should the project be undertaken on the basis of
NPV and discounted PBP?

2. Sportsman plc is a manufacturer of sports equipment. The firm is considering whether to

invest in one of two automated processes, the Lara or the Carling, both of which give rise to
 staffing and other cost savings over the existing process. The relevant data relating to each are
given below:

The investment outlays are obviously additional cash outflows, while the annual cost savings are
cash flow benefits because total annual expenditures are reduced as a result of the investment.
Should the company invest in either of the two proposals and if so, which is preferable, using the
NPV, IRR, PBP and Profitability Index approach?

3. Branton & Co. Ltd is choosing between two mutually exclusive investment opportunities,
Project A and Project B. The estimated cash flows for the two projects are as follows:

Calculate:
(a) the net present value for both projects.
(b) the approximate internal rate of return for Project A.
(c) the payback period and discounted payback period for both projects.
(d) the profitability index for both projects
(e) the accounting rate of return for both projects
Which project must be selected based on your calculations.
4. RTB plc has recently assessed a potential project to make and sell a newly developed
product. Two possible alternative systems have been identified, either one of which could be
used to make the product. The results of the assessment can be summarized as follows:

5. What is meant by capital rationing? What are the two types of capital rationing that exist
in real life?

Tutorial 9
1. What effect would inflation have on a company's cost of capital?
(Hint: Think about how inflation influences interest rates, share prices, corporate profits, and
growth.)
2. Why is the cost of debt less than the cost of preferred stock if both securities are priced to
yield 10 percent in the market?

3. How does internal equity differ from external equity?

4. Kelly Corp's bonds are selling to yield new investors a return of 9%, while its preferred stock
is yielding 11%. Flotation costs are 10% of the proceeds of new issues sold to the public, and
the firm's tax rate is 40%. The company just paid a dividend of RM2.00 and is expected to
grow at 6% indefinitely. Its stock is selling for RM21.20.
a. What is Kelly’s cost of debt?
b. What is Kelly”s cost of preferred stock?
c. What is Kelly’s cost of new equity?

5. NZ has a RM1,000 par value bond outstanding with 25 years to maturity. The bond carries an
annual interest payment of RM88 and is currently selling for RM925. NZ is in a 25 percent
tax bracket. The firm wishes to know what the after-tax cost of a new bond issue is likely to
be. The yield to maturity on the new issue will be the same as the yield to maturity on the old
issue because the risk and maturity date will be similar.
a. Compute the approximate yield to maturity on the old issue and use this as the yield for the
new issue.
b. Make the appropriate tax adjustment to determine the after-tax cost of debt.

6. The LexTech Company is trying to determine its weighted average cost of capital for use in
making a number of investment decisions. The firm's bonds were issued 6 years ago and
have 14 years left until maturity. They carried an 8 percent coupon rate, and are currently
selling for RM962.50.
The firm's preferred stock carries a RM4.60 dividend and is currently selling at RM42.50 per
share. LexTech's investment banker has stated that issue costs for new preferred will be 50
cents per share.
The firm has significant retained earnings, but will also need to sell new common stock to
finance the projects it is now considering. LexTech common stock is expected to pay a
RM2.50 per share dividend next year, and is expected to maintain an 8 percent growth rate
for the foreseeable future. The stock is currently priced at RM50 per share, but new common
stock will have flotation costs of 60 cents per share.
LexTech has present capital structure of 50 percent long-term debt, 10 percent preferred
stock, and 40 percent common stock. The tax rate is 34 percent.
Calculate LexTech’s Weighted Average Cost of Capital (WACC) before the retained
earnings break occurs.

Tutorial 10

1. NZ Athletic Wear has expected sales of 22,500 units a year, carrying costs of RM1.50 per
unit, and an ordering cost of RM3 per order.
a. What is the economic order quantity?
b. What does the EOQ formula tell us? What assumption is made about the usage rate for
inventory?
c. What will be the average inventory? The total carrying cost?
d. Assume an additional 30 units of inventory will be required as safety stock. What will the new
average inventory be? What will the new total carrying cost be?
e. Why might a firm keep a safety stock? What effect is it likely to have on carrying cost of
inventory?
2.

3 Explain how should the firm manage its inventory, accounts receivable, and accounts
payable in order to reduce the length of its cash conversion cycle.

4 What is the financial manager’s primary goal with regard to inventory management?
How does this goal compare with the inventory goals of production and marketing? What
trade-off confronts the financial manager with regard to inventory turnover, inventory
cost, and stock outs? In what way is inventory viewed as an investment? Why is it
important for the financial manager to understand the inventory control techniques used
by operations / production managers?

Tutorial 11
1.
Based on the above data calculate the DOL& breakeven point in ringgit
2.

Tutorial 12
1) ________ are just paper financial transactions.
A) Stock dividends and cash dividends
B) Stock splits and coupon payments
C) Stock splits and stock dividends
D) Stock dividends and interest payments

2) A ________ is a payment to current shareholders in which the payment is less than 25% of the
current shares held.
A) stock split
B) stock dividend
C) cash dividend
D) specially designated dividend

3) Stock splits and stock dividends ________.

A) are just paper financial transactions
B) divide the firm's existing shares into multiple shares with the same total dollar value
C) may be used to signal management's intentions to the marketplace
D) All of the above

4) Surf City Inc. has decided on a 3-for-1 stock split. If the firm currently has 900,000 shares
outstanding, how many shares will be outstanding after the stock split?
A) 3,600,000 shares
B) 2,700,000 shares
C) 1,200,000 shares
D) 300,000 shares

5) Tiger Training Inc. has decided on a 4-for-1 stock split. If the firm currently has 1,600,000
shares outstanding, how many shares will be outstanding after the stock split?
A) 400,000 shares
B) 1,600,000 shares
C) 3,200,000 shares
D) 6,400,000 shares

6) Tiger Training Inc. has decided on a 4-for-1 REVERSE stock split. If the firm currently has
1,600,000 shares outstanding, how many shares will be outstanding after the stock split?
A) 200,000 shares
B) 400,000 shares
C) 3,200,000 shares
D) 6,400,000 shares

7) Peterson Paper Products Inc. has 2,400,000 outstanding shares of stock selling for $52 per
share. After a 2-for-1 stock split, how many shares of stock are outstanding and what is the
change in the firm value (given no new information)?
A) 4,800,000 shares and a change in value of $124,800,000
B) 4,800,000 shares and a change in value of $0.00
C) 1,200,000 shares and a change in value of $124,800,000
D) 1,200,000 shares and a change in value of $0.00